CHAPTER I

REGIONALISM : A THEORETICAL PERSPECTIVE

OVERVIEW AND DEFINITIONS

,./ The functionalist and the nee-functionalist schools of thought have

provided the theoretical basis to the concepts of international cooperation

and regional integration that evolved in the post-World War II era.

/ 'International economic integration' is one aspect of international

economics which has been growing in importance in the past four

decades. The term itself has a rather short history - prior to 1942, there

was hardly any record of its use in academic or official circles. 1 Since

then, the term has been used at various times to denote a state of affairs

or a process involving the amalgamation of separate economies into larger

regions. More specifically, international economic integration is concerned

with the discriminatory removal of all trade barriers between the

participating nations and, with the establishment of certain elements of

cooperation and coordination between them. 2

1 Fritz Machlup, A History of Thought on Economic Integration (London, 1977), p.8.

2 ibid, p. 1 0.

13

Economic integration is defined as a process and as a state of

affairs. 3 Regarded as a process, it enc~mpasses measures designed to

abolish discrimination between economic units belonging to different

national states; viewed as a state of affairs, it can be represented by the

absence of various forms of discrimination between national economies.

In interpreting this definition, it is important to make the distinction

between integration and cooperation. The difference is qualitative as well

as quantitative. Whereas cooperation includes actions aimed at lessening

discrimination, the process of economic integration comprises measures

which entail the abolition of some forms of discrimination. For example,

international agreements on trade policies belong to the area of

international cooperation, while the removal of trade barriers is an act of

economic integration.• Regional economic integration has also been

defined as the process of reducing the economic significance of national

political boundaries within a geographic area. 5

There are other definitions of regionalism and regional economic

integration which do not take geographical factors into account. In this

3 Bela Balassa, The Theory of Economic Integration (london, 1961), p. 1 . 4 ibid, p. 4.

G Kym Anderson and Richard Blackhurst (eds.). Regional Integration and the Global Trading System (Hampstead, 1993), p.1. The authors point out that international economic integration could be unilateral, bilateral, regional or multilateral. This study is concerned with trade and policies at the regional and multilateral levels.

14

context, regionalism can be loosely defined as any policy designed to

reduce trade barriers between a subset of countries regardless of whether

those countries are actually contiguous or even close to each other. 6

However, it must be mentioned here that since this study concerns

regionalism, encompassing regional trade arrangements, in the context of

the multilateral trade arrangement, the WTO-defined term is adhered to.

Regional trade agreements (RT As) are defined as all bilateral. regional. and

plurilateral trade agreements of a preferential nature which are required to

be notified, as the case may be, under Article XXIV of the General

Agreement on Tariffs and Trade (GATT) 1994, Article V of the General

Agreement on Trade in Services or the. 1979 Decision on Differential and

More Favourable Treatment, Reciprocity and Fuller Participation of

Developing Countries (otherwise known as the Enabling Clause). 7

Hypothetically, a completely integrated world economy can be

defined in terms of the existence of a single set of prices for both factors

€>Jagdish N. Bhagwati, "'Regionalism and Multilateralism : An Overview", in Jaime de Melo and Arvind Panagariya (eds.), New Dimensions in Regional Integration (Cambridge, 1993), p. 43.

7 This definition is in accordance with the terms of reference of the Committee on Regional Trade Agreements (CRT A) which was established within the WTO to examine and monitor RT As. The CRT A and its role has been dealt with in detail in Chapter IV.

15

and commodities for all countries of the world. However, there never has

been a time when the world economy has been completely integrated. 8

APPROACHES TO THE STUDY OF ECONOMIC INTEGRATION

v~\Jheories of economic integration developed primarily as a

consequence of the attempt of W~stern European countries to form an

economic union. Of course, theories such as functionalism, which have an

important bearing on regional integration, were developed earlier. The

theories can be classified as those which were developed by political

scientists to understand and explore regional integration in the context of

international organizations and sovereign states; and those which view the

integration process primarily within the economic framework. Part I of this

section would discuss· the theories belonging to the first category and

Part II of this section would be devoted to theories based on economic

perspectives. )if

PART I : POLITICAL SCIENCE PERSPECTIVE

JFunctionalism and nee-functionalism (integration theory) are labels

that cover an array of research activities in this field. International

integration is concerned with the process whereby decisions formerly

made by officials of separate nation-states come to be made by officials at

8 P. E. Jacob and J. V. Toscano, Integration of Political Communities (Philadelphia, 1964), p. 3.

16

a new centre (international organization). International functionalism is

concerned with the process whereby specific activities (functions) come to

be performed by international organizations rather than by separate nation-

state authorities. 9 ./

/ The theory of functionalism and integration have significantly

enriched the study of international organizations along several

dimensions: 10

• They have drawn attention to the national and transitional social

contexts out of which international organizations arise, and the

relationships between these contexts and specific organizational

forms;

• They have directed attention to the process of organizational growth

across time. This overcomes. tendencies to neglect the pre-charter

development of international organizations and the post-charter

processes of growth never adequately reflected in charters.

• They have placed earlier preoccupations with military forces, both as

causes of war and instrumentalities for ensuring peace, in more

9 A.J.R. Groom, "'Theories of International Organization : Some Notes on the Literature'", in C. R. Mitchell and A.J.R. Groom, (eds.) International Relations Theory: A Critical Bibliogrpahy (london, 1978), pp. 345-7.

10 These observations are based on an article by Chadwick F. Alger, "Functionalism and Integration as Approaches to International Organization" in G. Abi-Saab, ed., The Concept of International Organization (Paris, 1981), p.125.

17

balanced perspective. This overcomes tendencies in many works on

international organizations to give secondary attention to the

economic and social causes of war and to overemphasize the

possibilities for military (collective security and peace-keeping)

solutions to the problems of war;

• They have used regions as laboratories for inquiry. This has made

research more manageable and has permitted study of organizational

phenomena not relevant to the globe as a whole; and

• They have extended the perspective of inquiry in ways that make it

possible to draw on different bodies of social science knowledge

that were earlier removed from international organization research -

socialization, learning, attitudes, organizational behaviour, etc. This

has overcome tendencies to treat international organizations as a

unique domain.

Functionalism and integration developed out of earlier thought,

debate, and experience with balance of power, collective security and

world government as approaches to international peace. The perceived

failure of balance of power - based on alliances among national military

forces to counter potential aggressors - led to the development of

collective security. 11 In collective security, the form of organization is

11 R.W. Cobb and C. Elder, International Community (New York, 1970), pp. 11-15.

18

radically different from balance of power, but the means to be used remain

the same -- military force. Collective security has had limited success partly

because big powers opted out, largely because of their ability to fend for

themselves through unilateral use of the same military power that might

have been utilized for the collective security of the entire community.

Some have proposed world government as a solution to this problem; but

proponents of this ideal have failed to offer plausible prescriptions on how

to reach this goal. 12

Inquiry focused on functionalism and integration has usefully

confronted the limitations of these approaches and significantly enriched

understanding of processes related to the development of international

organizations.

FUNCTIONALISM

v(While it is usually a futile exercise to try to attribute to any one

writer the development of theory wt'lich is regarded as seminal, David

Mitrany's development of functionalism is an exception. In his classic

essay A Working Peace System, 13 first published in the inter-war period,

Mitrany provided a major impetus to the functionalist school of thought.

62 Paul Taylor, International Cooperation Today (london, 1971), pp. 36-39. ,..-""

<..1Y David Mitrany, A Working Peace System (Chicago, 1966). The ideas on functionalism were first published in 1943.

19

Karl W. Deutsch spurred a complementary line of effort in his works on

integration. 14

MITRANV'S APPROACH

As set forth by Mitrany, the concept of functionalism is based on

certain assumptions about the causes of war and peace :15

i

1. Social and economic maladjustments are the basic causes of war.

2. Social and economic welfare is the precondition of peace.

It is further assumed that:

3. The nation-state system cannot deal with basic social and economic

problems because global society is arbitrarily divided into units based on

territory rather than units based on problems to be solved.

This leads to the proposal that :

4. Institutions based on function, not territory, would be appropriate for

solving basic social and economic problems.

14 Karl W. Deutsch, Political Community at the International Level: Problems of Definition and Measurement (New York, 1954); and Political Community in the North Atlantic Area (New Jersey, 1957).

15 These assumptions are culled from David Mitrany, UThe Prospect of Integration: Federal or Functional'" in A.J.R. Groom and P. Taylor, eds., Functionalism . Theory and Practice in International Relations (London, 1975), pp.119-145.

20

These assumptions of functionalism represent a radical departure

from balance of power, collective security and most world-government

thinking, which assumes that military force is required to prevent war.

Functionalism presumes to offer means for overcoming suspicion

and distrust which have often prevented the building of peace systems.

5. Functional cooperation can begin with non-political, more technical

problems.

6. Cooperative experience gained in one functional area can be

transferred to another.

These two assumptions have stimulated extensive debate and

inquiry. The sixth assumption is often referred to as "spill over" which

consists of a complex of social and psychological processes.16

First, there is the assumption that patterns of cooperation in one

function will provide examples that can be duplicated in other sectors.

Second, there is the assumption that social and economic functions

are not independent (example, trade and banking) and that functional

cooperation in one will generate a need for cooperation in another.

Third, there is the notion that participants in functional cooperation

will have experiences to dissipate suspicion and distrust on the part of

' ,~ lnis L Claude, Swords into Plowshares (New York, 1956), pp. 21-30.

THESIS 382.92

84692 Re

lllllllllllllllllllllllll TH8562

21

their counterparts in other nation-states and even develop new loyalties to

the new institutions in which they work. It is also expected that this

eroding of distrust and new loyalties will spread to people at large who

derive benefits from functional institutions.

Functionalism also assumes that:

7. Cooperation will extend to more and more functions to the point that

a "web of international activities and agencies" will 'overlay political

divisions'.

8. Ultimately these agencies will require coorciinating bodies, which will

eventually require planning agencies, which will eventually evolve into a

general authority for overall coordination. 17

Although the ultimate aim of Mitrany's functionalism was the

construction of a viable administrative structure to insure world peace, he

concentrated on the means to this end :

"The task that is facing us is how to build up the reality of common

interest in peace ... Not a peace that would keep the nations quietly apart,

but a peace that would bring them actively together; not the old static and

strategic view of peace, but a social view of it ... We must put our faith not

in a protected but a working peace; it would indeed be nothing more n()r

17 Mitrany, n.9, p.51.

22

less than the idea and aspiration of social security taken in its widest

range". 18

It was thought that functionalism could cope with change because it

worked from the particular problem and the relations suggested by it,

rather than from some constitutional system, or idealized set of political or

social relationships which were imposed upon it.

The proponents of the theory have argued that institutions based on

functions and not territories would be imperative in solving international

economic and social problems. The theory suggests that functional

cooperation among countries of the world could begin in non-political,

economic, social and other technical areas, where disagreements amongst

nations would be the least. This approach allows the view that there is no

point at which the state would necessarily lose its sovereignty. It holds,

rather, that the issue of sovereignty becomes irrelevant to the important

issues in the emerging world society. 19

As the state is not thought to be necessarily losing its sovereignty,

so there is to be no single place in international society which is

necessarily gaining it. '"Functionalism is not, however, either Utopian or

18 ibid, p. 51 19 These views were held forth at a conference on the subject, the proceedings of

which are recorded in A.J.R. Groom and P. Taylor, (rapporteurs), Functionalism (New York, 1969).

23

teleological in its view of international integration: rather it stresses central

principles in the attainment of a more effective 'working peace system'. 20

International society was seen as being made up of an increasing number

of international institutions with competence, in particular functional areas,

the territories of which interact and overlap with each other. No ideology

or political scheme must be allowed to impose a co-extensiveness upon

these territories: the function must prevail. It is because of this that David

Mitrany opposed movements towards regional political unification such as

that in Western Europe. There were many functions which had to be

organized on a regional basis, such as coal and steel in European Coal and

Steel Community; but according to him, there were many others which

were best organized on a continental or a universal basis: the nature of the

function determines this.2'

DEUTSCH'S APPROACH

Karl Deutsch tackled the issue of functionalism from an angle quite

different from Mitrany. Basing his perspective on international political

communities, he focused his inquiry on the conditions that account for the

"absence or presence of significant organized preparations for war or large-

scale violence ... " 22 Deutsch defines a security community (i.e. one with a

20 Paul Taylor, Functionalism: The Theory of David Mitrany (london, 1979), p.11. 21 David Mitrany, The Functional Theory of Politics (london, 1975), pp.15-17. 22 Karl Deutsch quoted by Alger, n. 1 0, p. 128.

24

central government) as one where such conditions are absent. In his terms,

integration is the creation of uthose practices and machinery - those habits

and institutions which actually result in the establishment of a security

community". 23 He deepened his analysis by not only addressing kinds of

linkages between nation units, but also their internal characteristics, and

similarities and differences between these units.

According to his theory, linkage between units is concerned with

mobility of persons as well as messages, the range of subjects of

communications, balance in two-way flows and mutual predictability

produced through these communication links.24 Similarity of units is

concerned with compatibility of main values and sharing of a distinctive

way of life. Internal characteristics include factors such as economic

growth, increasing political and administrative capability, broadening

political elites, and expectation of economic gain from integration. This

array of variables pr.ovides an important context for inquiry into the

development of international organizations.

23 Deutsch, n. 14 (1954), p. 11. 24 Karl W. Deutsch, The Analysis of International Relations (New Jersey, 1968), p.

198.

25

To sum up:

• Functional institutions created to meet specific welfare needs are

supposed to gradually wean individual loyalties away from sovereign

nation-states and transfer them to a variety of institutions.

• Functionalists believe that the 'welfare functions' can be separated

from the political functions, and that the economic welfare sphere

can be taken over by new institutions. They hold that politics and

economics are the separate functions of the state.

• Functionalism does not aim to create a nP.w centre of sovereignty

and political power, but rather to .diffuse the functions of, and

therefore disarm the nation-state. Its adherents argue that welfare

needs are not coterminous with national boundaries, that a specific

welfare need may be coterminous with one set of states, but that a

closed regional system does not have the flexibility to meet all

welfare needs of the group's populace.

• By identifying specific technical and 'non-controversial' aspects of

governmental conduct, and weaving an ever-spreading web of

international institutional relationships, the countries would expand

practical cooperation. Just as when a person throws a stone in a

pond, it generates concentric circles of the ripples of water,

similarly, collaborative effort by countries in specific policy issues of

26

common interest will spill over into other ·policy areas, thus

establishing a stable and working peace system.

CRITICISM

A number of inconvenient questions pertaining to the functionalist

theory have cropped up:25

1 . What is the guarantee that the functional agencies performing

practical tasks, would be free from political tensions and conflicts?

2. Even if cooperation in the functional areas was established, what are

the possibilities of the spill-over of this positive cooperation in the

political field?

3. Ideological and political disagreements first expressed in the political

bodies could, as well, spill over into the functional agencies, thereby

damaging the prospects of establishment of an international

cooperative arrangement, and reducing the global efforts into a

charade. Just as a storm can disrupt the concentric circles on the

water surface, a war on any issue can disrupt the whole framework

of cooperation that may have been built.

25 Claude, n.16, p. 254.

27

NEOFUNCTIONALISM

""'1\/'-v' [Neofunctionalism is the label given to a substantial body of thought

on integration which has been developed since the late 1950s.

Neofunctionalists rely on the method of pure functionalism, but apply it to

a new arena: the regional political system. This body of writing is not a

theory in the formal sense of the term, but rather a group of hypotheses

about how a regional system can come to be integrated. Its chief

proponents have been American political scientists, most notably Ernst B.

Haas and his student leon lindberg. The nee-functionalist conception of

international organization finds direct expression in the European

Community. The Community in its early stage was the inspiration for the

thesis in the form in which it was originally offered by E.B. Haas in his

study The Uniting of Europe. 26 ·In another pioneering work, 27 he has applied

this approach to the study of the International labour Organization (ILO).

REFORMULATION OF FUNCTIONALISM BY HAAS

Ernst B. Haas reformulated the thrust of Mitrany's system in three

ways:

First, he sought to bring it down from the level of pure theory to the actual

@ Ernst B. Haas. The Uniting of Europe : Political, Social and Economic Forces, 1950-57 (Stanford, 1958).

0Ernst B. Haas, Be~ond the Nation State (Standford, 1964).

28

application to regional groupings or existing international organizations.

Second, he attempted •to integrate functionalism and general systems

theory.

Finally, Haas tried to produce a set of hypotheses that could be tested in

the light of empirical evidence to determine the actual impact of

functionalism on international affairs.

Haas restated four basic principles of the functionalist heritage as

they applied to the contemporary world:28

• According to him, Mitrany's claim that 'power is separate from

welfare' was misleading in its applications. He believed that power

was a means of describing a particular ability to coerce and to

satisfy a set of welfare aims.

• He reevaluated Mitrany' s assertion that governments whose policies

are conceived in terms of power will develop welfare concerns

easily, and that the lessons of functionalist cooperation in one area

will be applied in others.

• He modified Mitrany's assertion that integration is maximized by the

cooperative efforts of international experts and voluntary groups.

The smaller the group, Haas asserted, the better were the chances

28 ibid, pp. 6-10.

29

of integration - universal participation was thus considered a

hindrance to cooperation.

• Finally, he questioned Mitrany' s insistence that there can be a

gradual transfer of political loyalties to international organizations

when global institutions become more successful in fulfilling

functions formerly assumed by national governments.

CONTRIBUTION OF THE NEOFUNCTIONALISTS

Haas' pre-eminent role as a neofunctionalist is related to his study of

the impact of functionalism in the ILO's attempt to further integration of

the world community. 1Thro~ghout Beyond the Nation State, Haas remains ,""--

sceptical of functionalist claims and at times actually rejects them. He

concludes that any cooperation that has occurred has been based not on

calculations of the benefits involved for humanity, but rather on a

convergence of separate interpretations of patterns of national interes!.

This approach to regional integration assumes that actor behaviour

in a regional setting is analogous to that in a modern pluralist nation-state

and takes for granted that these actors are motivated by self interest) The

central proposition can be summarized as follows: 29

(2

; ,Ernst B. Haas and Philippe C. Schmitter, International Political Communities v.

(New York, 1966), p. 261.

30

There exists a continuum between economic integration and political

union: the two areas ar~ linked by an automatic 'politicization process' -

the spill-over effect. Actors are involved in an incremental process of

decision-making, beginning with economic and social matters - welfare

maximization- and gradually extending to the political arena (Grosspolitik).

Ernst Haas, having identified the political community as his terminal

condition, defines 'integration' as a process whereby· political actors in

different countries are gradually persuaded to shift their loyalties,

expectations and political activities towards a new larger centre whose

' !

institutions possess or demand jurisdiction over the nation states. 30 His

findings and speculations on functionalism and international organizations

are the basis of another study3' by a former student, James Patrick Sewell.

This work attempts to develop a coherent neo-functionalist view of the

financing of economic development through the United Nations system,

with particular emphasis on the programmes of the International Bank for

Reconstruction and Development (IBRD). Like other neo-functionalist

analyses, Sewell's is an endeavour to develop a conceptual framework to

. compl~::ment an empirical evolution of the performance of a particular

international organization operating, theoretically at least, on the basis of

' \ ~Haas, •tnternational Integration : The European and the Universal Process",

n.29, p. 94. 31 James Patrick Sewell, Functionalism and World Politics : A Study Based on

United Nations Programs Financing Economic Development (Princeton, 1966).

31

functionalist principles. Sewell considers 'attitudinal change' a measure of

progress towards integration:

uFunctional efforts are dedicated to the solution of problems, not the

raising thereof, of organizational monuments. The efficacy of functional

efforts is to be gauged less by quantitative indications than by solutions to

these problems, and by the closely related consequence which is to

accompany participation in the problem-solving process - the change of

attitudes by participants. "32

I

Jv Another former student, Leon N. Lindberg, emphasized on Haas' '

investigation of the European Community. His study33 begins with the

analysis undertaken in Haas' The Uniting of Europe, and specifically

attempts to apply functional theory to the level of analysis that seems

most promising: regionalism, specifically the European Economic

Community (EEC). He argues that an initial contribution to the success of

, the EEC was the flexible framework provided by the Treaty of Rome.

Following Haas' example, lindberg conceives of political integration as a

process rather than as a condition. The process is characterized by a

gradual evolution toward a legitimate mechanism for the resolution of

~ipid, p.189.

(33A_eon N. lindberg, The Political Dynamics of European Economic Integration ..........

(Stanford, 1963).

32

conflict for the making of authoritative decisions involving the majority of

interests.

Lindberg explained the pattern in regional cooperation thus: a

commitment based on perception of national as well as international gains

stimulates the development of national interest groups that benefit from

integration. Such groups then form natural pressure groups autonomous of

national elites and are able to lobby for continued integration no matter

what the policy of a particular regime.~)._, .....

"His additions to neofunctionalism suggest that, if certain elites stand "

to benefit and can convince their counterparts that everyone's future

growth depends upon continued compromise and integration, one could

theoretically construct a transnational system to fulfill the needs of an

1-,. increasingly interdependent world~ Closely knit, voluntary, and regional

. I

functional groups are more likely to achieve integration than are

organizations that have representatives from across the globe.

~ G.indberg teamed with S.A. Scheingold to expand earlier studies of

functionalism at the regional level.35 They have found that functional

economic cooperation has rebuilt European economies by ignoring larger

concerns and by reconstructing instead the political foundations of

34 ibid, p. 114. 35 Leon N. Lindberg and S.A. Scheingold, Europe's Would be Policy: Patterns of

Change in the European Community (New Jersey, 1970).

33

individual European nations. They identified a new type of decision-making

process in which barg~ining has replaced the bickering of individually

4-/ defined interests. ~1• •

SHORTCOMINGS

The original neofunctionalist approach, represented . by the writings

of Haas, Lindberg, Scheingold, 1 among others, were criticized by other i

students of integration on several counts.36

• The first point dealt with the purported neglect of exogenous factors

as contributing variable to regional integration.

• The second concerns the "Europe-centric" nature of neofunctionalist

research and propositions, which are perhaps. tailored to the

European setting and stage of development and are often peripheral

to integration processes in developing regions or to the former

socialist countries.

• The third point centers on the basic neofunctionalist assumption that

there is a continuum between the economic and political sectors of

nation states permitting functional integration to spill over from the

)I' / l

~ ~r' ' \J ' '­

.'\ , 36 This critical assessment has been summarized from the writings of : (i) Stanley

'o./ Hoffmann, .. Obstinate or Obsolete? The Fate of the Nation- State and the Case of Western Europe", in; ~6s't'Ph S. Nye, ed., International Regionalism (Boston, 1968), pp. 177-230; and Wl- Roger D. Hanson, .. Regional Integration : Reflections on a Decade of Theoretical Efforts •, World Politics, val. 21 ( 2), January 1969, pp. 242-71. _...~

34

welfare area into the domain of Grosspolitik in an automatic fashion,

resulting in the emergence of a new regional unit. This is a historical

status quo argument which does not take evolutionary forces

working in each society into consideration.

THE CONFIGURATIVE APPROACH TO THE THEORY OF INTEGRATION

This approach to the study of integration at the international level is

the most comprehensive one for the analysis of regional socio-political

systems because it takes a broader view by considering both internal and

external factors of integration. The principal representative of this school is

Amit~~ _Etz~o~i whose work on political unification37 can be regarded as the ---~

contemporary classic in this field.

'{A_ ~n contrast to Haas, Etzioni uses 'integration' to refer to a condition

rather than to a process, explaining that a political community is a

community that possesses three kinds of integration: 38 7 _.;

a) It has an effective control over the use of the means of violence

(though it may delegate some of this control to member units);

IP' ~Amitai Etzioni, Political Unification :A Comparative Study of Leaders and Forces (New York, 1965).

~_..-Amitai Etzioni, quoted in K.A. Dahlberg, .,Regional Integration: The Nee­functional versus a Configurative Approach", International Organization, vol. 24(1), 1970, pp.122-28. ----

35

b) it has a centre of decision-making that is able to affect significantly

the allocation of resources and rewards throughout the community; . and

c) it is the dominant focus of political identification for the large

majority of politically aware citizens.

\-.' , Another student of comparative regional integration is Joseph S.

Nye, who established himself as a persistent critique of the 'Europe-

centric' neofunctionalist school. In his attempt to compare integration

movements in Central America, East Africa and Western Europe, Nye paid

attention to both the internal and external forces at work in these areas,

thus following the 'configurative approach'. Having defined 'integration' as

'forming parts into a whole or creating interdependence', Nye establishes a

three-tier concept: economic integration (the formation of a transnational

economy), social integration (the formation of a transnational society), and

political integration (the formation of a transnational political

l ?y

interdependence).39 '!..r'

REVISED THEORY OF INTEGRATION

~

vtln reflecting on the achievements and problems of research on

regional integration in 1970, Ernst Haas ce~me up with a fundamental

f"."/' \

0('39 Joseph S. Nye, "Comparative Regional Integration : Concept and Measurement", International Organization, vol. 22(4), 1968, p.858.

36

reconceptualization of what he calls a I dependent variable'. 40 In 1958 he

had spoken of integration as a uprocess whereby political actors in several . .

distinct national settings are persuaded to shift their loyalties,

expectations, and political activities towards a new and larger centre,

whose institutions possess or demand jurisdiction over the preexisting

national states. 41 In his revisionist theory in 1 970, he offers a new

definition: uregional integration is concerned with explaining how and why

states cease to be wholly sovereign, how and why they voluntarily mingle,

merge, and mix with their neighbours so as to lose the factual attributes of

sovereignty while acquiring now techniques for resolving conflict between

themselves".42 Thus emphasis is shifted from the creation of a new and

'l~ larger centre to a shift of authority and legitimacy out of old centres. t v-_.

PART II : ECONOMIC PERSPECTIVES

Economists over the century had taken the free trade model as the

ideal towards which the nation states should move. There was not much

emphasis in theory about the role of regional economic integration. But

when the Western European countries began having a vision of an

,... ~0~ Ernst B. Haas, "The Study of Regional Integration : Reflections on the Joy and , Anguish of Pretheorizing", International Organization, vol. 24(4), 1970, pp.607-645.

41 Ernst B. Haas quoted in Alger, n.10, p.136. 42_Haas, n.40, p.610.

37

integrated Europe built on the integrated economy,- economists began

examining theoretically various aspects of economic integration.

THEORY OF PREFERENTIAL REDUCTIONS OF TRADE BARRIERS

In the still-evolving theoretical paradigm of regional integration, the

Theory of Preferential Reductions of Trade Barriers is of primary

significance. This theory consists of four related, yet distinct, sets of

analytical approaches.

(a) VINER-LIPSEY-MEADE APPROACH

JOr;

~lso categorized as the mainstream customs union theory, most of

the analysis in this approach is conducted in terms of the central concepts

of trade creation and trade diversion. The seminal distinction between the

two concepts was Introduced by Jacob Viner in his classic The Customs

Union Issue. 43 The former term relates to newly created trade between the

member countries 'lf the union, the latter to trade diverted from a foreign

country to a member country, both consequent upon the abolition of tariffs

within the union) h.

~

'~{;/spite the title of the book, Viner emphasizes that customs union is

but one of a number of possible preferential trading arrangements. The key

43 Jacob Viner, The Customs Union Issue (New York, 1950).

38

passage that concerns his explanation of the trade~creating and trade­

o/ diverting effects of a customs union: .

"There will be commodities, which one of the members of the customs union will now newly import from the other but which it formerly did not import at all because the price of the protected domestic product was lower than the price at any foreign source plus the duty. This shift in the locus of production as between the two countries is a shift from a high-cost to a lower-cost point ... There will be other commodities which one of the members of the customs union will now newly import from the other whereas before the customs union it import~d them from a third country, because that was the cheapest possible source of supply even after payment of duty. "44

Under the assumption of pure competition, constant costs, and zero

transportation costs, the world market price of any commodity will be

equal to the cost of production in the lowest-cost country. It follows that

countries whose production costs are higher than the sum of the tariff and

the world market price will import the commodity in question from the

lowest-cost source, while other countries will produce it domestically.

TRADE CREATION vs TRADE DIVERSION: AN OUTLINE

Suppose a customs union is formed between countries A (home country)

and 8 (partner country) which excludes country C (non-member). Five possible

cases can be distinguished:45

44 ibid, p.43. 45 Richard Pomfret, The Economics of Regional Trading Arrangements (Oxford,

1997), pp. 134-36.

39

( 1) Both participating countries produced the commodity in question prior

to the formation .of the customs union, and the union includes the

lowest-cost producer. After the union is established, the inefficient

producer - A - will cease to produce this commodity, and its entire

demand will be satisfied through importation from country 8 (trade

creation). The same result would follow if tariffs against all countries

were abolished.

(2) Both countries produced the commodity in question under protection,

and the union does not include the lowest-cost producer. The removal

of tariffs between the participating countries will again create new

trade, since the exploitation of cost differences, which was previously

prevented by the tariff, will now become possible. This new position is

however, inferior to universal free trade, since under this condition

neither member country would produce the commodity, but both

would import it from the lowest-cost source.

, (3) Country 8 is the lowest-cost producer, A did not produce the

commodity under tariff production. No change takes place after the

union is formed (same as under free trade).

(4) 8 produced the commodity under protection, while A imported it from

C, the lowest-cost source. Removal of tariffs between A and 8 shifts

A's entire import demand from C to 8, since- under the assumption

of uniform tariff levels - production costs in 8 are less than the sum

of the tariff and the cost of production in C (trade diversion). The

40

resulting situation is less efficient than that existing prior to the

union's establishment, and less efficient than universal free trade.

(5) Neither A nor 8 produced the commodity under tariff protection. No

change takes place after the union is established; both countries will

continue to import the commodity from the lowest-cost source C

(same as under free trade).

Trade creation, then represents a movement toward the free-trade

position, since it entails a shift from high-cost to low-cost sources of

supply, while trade diversion - a shift of purchases from lower-cost to

higher-cost producers - acts in the opposite direction. According to Viner,

the beneficial effects of the union will predominate, if trade creation

outweighs trade diversion.

\ ~~-~The analyses from Viner has been extended by J.E. Meade46 and

R.G. Lipsey/7 adding consumption effects to the production effects. They

came up with the propositions that:

(i) a customs union is more likely to raise welfare the higher the

proportion of trade with the country's union partner and the lower

the proportion with the outside world;

46 J.E. Meade, The Theory of Customs Union (Amsterdam, 1955). I

~R.G. Lipsey, "The Theory of Customs Union: Trade Diversion and Welfare", ~ Economics, vol.24 (1957), pp.40-46.

41

(ii) a customs union is more likely to raise welfare the lower the total

volume of foreign _trade is relative to domestic purchases prior to the

formation of the union.

Viner's main contribution was to destroy the common fallacy that a

) ""'-'· preferential move towards free trade was necessarily welfare improving.

(b) KEMP-WAN APPROACH

't.£t~n alternative theoretical approach, has been proposed by Murray

Kemp and Henry Wan.48 It shows that any group of countries could form a

customs union with a common external tariff, given two desirable

properties : (i) The non-members would have their welfare unchanged, and

(ii) The members would improve their own welfare.

Theoretically, this is an important contribution because it shows that

preferential groupings can always be devised, in principle, for any given

subset of countries, such that they are a Pareto-improvement over the

initial pre-union situation. Pareto-improvement means that no country

within the union is worse off and at least one is better off. The question

then is whether the specific grouping proposed satisfied the surficiency

conditions for such Pareto-superior welfare-improving unions. However,

the theorists merely provide proof of the theoretical existence of such

/I

@ Murray Kemp and Henry Wan, "An Elementary Proposition Concerning the Formation of Customs UnionsH, Journal of International Economics, Vol.6 (1976), pp.432-76.

42

unions but do not provide any guidance as to the necessary and sufficient

conditions that such unions might satisfy.

(c) COOPER-MASSEL-BHAGWATI APPROACH

Another approach to customs union theorizing, reflective of the

concerns of small developing countries, was taken by Charles A. Cooper

and B.F. MasseV9 and Jagdish N. Bhagwati.50 They argued that if a given

target level of aggregate import-competing industrialization were the

objective, the cost of it to developing countries with small markets could

be reduced by unions that permitted trade and mutual exchange of

industrial production among themselves (with scale economies exploited

within the union) while maintaining protection against the manufacturers of

the developed countries.

This argument builds on economies of scale; but specialization in

manufactures within the union would be profitable even without invoking

scale economies. Whi!e it treats any given degree of overall

industrialization as a unon-economic" objective, it holds that the proposed

union achieves gains for member countries subject to given import

(.[, v vCharles A. Cooper and B.F. Masse!, "A New look at the Customs Union

Theory", Economic Journal, vol.25 (1965), pp.742-47; and "'Towards a General Theory of Customs Unions for Developing Countries", Journal of Political Economy, vol. 73 ( 1965), pp.461-76.

50 Jagdish Bhagwati, "Trade liberalization among LDCs, Trade Theory and GATT Rules", in Value, Capital and Growth : Papers in Honour of Sir John Hicks (Oxford, 1968).

43

substitution for the aggregate union vis-a-vis the non-member (developed)

countries, which therefore leaves non-member countries' welfare

unchanged.

(d) BRECHER-BHAGWATI APPROACH

The previous approaches consider either the welfare effects of

forming arbitrarily specified customs unions (the Viner-Lipsey-Meade view)

or the judicious formation of customs unions so as to achieve Pareto-better

outcOmes (the Kemp-Wan and Cooper-Massei-Bhagwati approaches). An

alternative approach introduced by Richard Brecher and J. Bhagwati, 51

provides the mechanism to analyse the welfare effects of parametric and

policy variations in customs unions with common external tariffs and with

freedom of intraunion factor movements.

In analysing the effects of changes in tariffs, transfers, etc., on

specific groups of productive factors within a country, these theorists

argue that their theory has a perfect analogue in the analysis, within the

European Community, of the effect of changes in the external tariff on, for

instance, the welfare of Britain (i.e., the British factors of production),

France, Germany, etc. This analytical approach provides, as the European

Community moves to full integration, the necessary tools to analyse

J

r " v',Richard Brecher and J. N. Bhagwati, "Foreign Ownership and the Theory of 'Trade and WelfareH, Journal of Political Economy, vol.89 ( 1981 ), pp.497-512.

44

related issues, such as the effect of the Common Agricultural Policy on

individual countries' welfare, by providing a scientific basis for calculating .. costs and benefits.

THE NEW REGIONALISM

Jt.tarting in the mid-1980s, new ideas began to be developed which

challenged traditional customs union theory. The main intellectual spur was

the 'new trade theory' based on models of imperfect competition.52 This

kind of thinking downplays the significance of trade diversion in a world in

which tariffs have become less important than non-tariff barriers to trade.

The new regionalism also draws on the new trade theories which

integrated scale economies and imperfect competition into mainstream

trade theory. Thinking on new regionalism has a more positive vision of

discriminatory trading arrangements than traditional customs union theory. J

OPEN REGIONALISM

The concept has been formulated with respect to the current phase

of regionalism, in contrast to the closed, import-substituting regionalism of

the 1950s and 1960s. 'Open Regionalism' has been adopted as a

fundamental principle of the Asia-Pacific Economic Cooperation (APEC)

from its creation in 1 989.53 In an effort to pave the way for defining the

52 Pomfret, n.45, p. 148.

§0Jeffrey Frankel and Shang-Jin Wei, .. Open Regionalism in a World of Continental Trade Blocs·. IMF Working Paper, WP/98/1 0, 1998, p. 4.

45

..,

concept, an APEC-centred definition was attempted only in 1 994 by the

Eminent Persons' Group (EPG) appointed by the APEC. 54 A clearer

- definition of the term was outlined by the Council of Economic Advisors to

the President of the United States in 1 995:55

Open regionalism refers to plurilateral agreements that are non­exclusive and open to new members to join. It requires first that plurilateral initiatives be fully consistent with Article XXIV of the GATT... Beyond that it requires that plurilateral agreements not constrain members from pursuing additional liberalization either with non-members on a reciprocal basis or unilaterally. Because member countries are able to choose their external tariffs unilaterally, open agreements are less likely to develop into competing bargaining blocs. Finally, open regionalism implies that plurilateral agreements both allow and encourage non-members to join in.

The staunchest advocate of open regionalism, Fred Bergsten, offers

five criteria for adhering to the concept: 56

i) Open membership with positive encouragement to non-members to

join;

ii) Unconditional MFN treatment;

iii) Conditional MFN extension, whereby an RT A would generalize its

reductions of barriers to all non-members that agreed to take similar

steps;

54 APEC, Achieving the APEC Vision : Free and Open Trade in the Asia-Pacific : Second Report of the Eminent Persons' Group to APEC Ministers (Singapore, 1994), pp. 54-56.

55 Council of Economic Advisors, Economic Report of the President (Washington D.C., 1995), p. 220.

56 C. Fred Bergsten, "Open Regionalism", Working Paper, 97-3, Institute for International Economics (Washington D.C. 1997), pp. 4-7.

46

iv) Global liberalization, whereby members of an RTA would continue

reducing their tarjff while pursuing their regional goals, continuing

with unilateral liberalization and multilateral negotiations in the WTO;

v) Trade facilitation through non-tariff and non-border measures, such

as customs harmonization, mutual recognition of product standards,

cooperation in enforcing national competition policies, and

deregulation of key domestic markets.

CRITICISM

Critics of open regionalism find the very term inherently

contradictory : arrangements that are open cannot be regionally confined

and those that are regionally confined cannot be open. One of the most

vocal critics of the idea goes so far as to call 'open regionalism' an

oxymoron. 67

Critics further point out that the 'open membership' policy can

include several unpleasant 'side payments' which are essentially unrelated

to trade. These include acceptance of a stronger intellectual property

rights regime, investment rules, and higher labour and environmental

standards. 58

57 T. N. Srinivasan has criticised the concept in the strongest terms in .. APEC and Open Regionalism", (mimeographed), (Yale, 1995), p. 59.

58 Jagdish N. Bhagwati, "Fast Track to Nowhere", Economist, 18 October 1997, pp. 21-23.

47

This term has been used most frequently to describe the

developments in Asia; and Asian regionalism has been truly 'open' in that . liberalization undertaken by members of Asian regional groups has been

essentially non-discriminatory. APEC has created no trade preferences.

However, regional trade arrangements in North America, Latin America, or

Europe do not conform to the standards of openness laid out in the

definition of the concept. 59

FORMS OF ECONOMIC INTEGRATION

Economic integration can take several forms that represent varying

degrees of integration. These are: free-trade area, customs union,

common market, economic union, and complete economic integration. 60

(i) Free Trade Area (FT A) : If the members of participating countries

eliminate or reduce al:l tariffs and quantitative restrictions among

themselves, then they form a free trade area. Typically, they retain varying

levels of tariffs and other barriers against the products of non-members.

Examples include the US-Israel FTA, the Canada-US FTA, and the

European Free Trade Association (EFT A).

~Arvind Panagariya, "The Regionalism Debate : An Overview" (mimeographed), 1998, p. 44.

60 Balassa, n.3, pp. 9-10.

48

(ii) Customs Union : The next level of integration occurs when the

members of an FT A go beyond removing trade barriers among themselves . and set a common level of trade barriers vis-a-vis outsiders. This at a

minimum entails a common external tariff. A full customs union would also

harmonize quantitative restrictions, export subsidies, and other trade

distortions. It would set all trade policy for its members as a unified whole.

Example, the EEC-Accession of Portugal, Spain, Austria, Finland and

Sweden was presented as a customs union to the GATT. Another example

is the Andean Group comprising Bolivia, Colombia, Ecuador, Peru and

Venezuela.

(iii) Common Market : Beyond the free exchange of goods and services

among members, a common market entails the free movement of factors

of production - labour and capital. The free movement of capital applies to

foreign direct investment (FDI). Example, the European Community.

(iv) Economic Union : Going beyond the free movement of goods,

services, and factors, economic union involves harmonizing national

economic policies, including taxes and a common currency, in order to

remove discrimination due to disparities in these policies. The decision of

the European Community to evolve to the European Union in 1994

represented a determination to proceed to this higher stage of integration.

49

(v) Total Economic Integration : This stage presupposes the unification

of monetary, fiscal, socJal, and counter cyclical policies and requires the

setting up of a supra-national authority whose decisions are binding for the

member states. A full unification of economic policies would in turn require

political federation.

The first two stages, FTAs and customs unions fall within the range

of shallow integration efforts, while the latter two more advanced stages

constitute deep integration.

Country groups often choose names that are far too ambitious for

the kind of integration that they are prepared to undertake. Neither the

members of NAFT A or the A SEAN FT A expect to literally eliminate all

interior barriers to trade, as the definition of 'free trade area' would imply.

The Central American Common Market is yet to become an FT A, let alone

a customs union or common market.

It is important to note that each of these forms of economic

integration can be introduced in its own right : They are not stages in a

process which eventually leads to complete political integration.

The above mentioned forms of regional groupings have been

classical forms. There are a few departures to this strict categorization.

These are specially found in the post-Cold War period regional groupings.

These groupings do not go very far to seek complete integration of the

50

economies. Nevertheless, they encompass more than mere trade

liberalization. They include technology, labour, and investment agreements . along with trade liberalization which also includes trade in services. An

outstanding example of this type of regional integration is the North

American Free Trade Agreement (NAFTA).61

International economic integration can be positive or negative. The

term 'negative integration' was coined by Jan Tinbergen62 to refer to the

removal of barriers on trade between the participating nations or to the

elimination of any restrictions on the process of trade liberalization. The

term 'positive integration' relates to the modification of existing

instruments and institutions, and to the creation of new ones so as to

enable the market of the integrated area to function properly and

effectively and also to promote broader policy aims of the union. Within

this framework, it can be stated that free trade areas are forms of

international economic integration which require only 'negative

integration', while the remaining types require 'positive integration', since

61 The NAFT A which entered into force in January 1994 between Canada, the USA, and Mexico, has agreements covering a range of subjects over and above trade liberalization - elimination of all border measures applying to agricultural products, MFN treatment in financial services, energy, intellectual property protection, investments, labour, and environmental regulations. A distinctive feature of the agreement are the extensive provisions for dispute settlement. NAFT A, Agreement Establishing the North American Free Trade Agreement (December 1992), 32, I.L.M.289 and 32 I.L.M.605.

62 Jan Tinbergen, International Economic Integration (Amsterdam, 1954), p.24.

51

they all require the positive act of adopting common external relations, or

as a minimum, a Commo.n External Tariff (CET).

Summing up, the most significant contribution of the literature on

functionalism and integration has been the development of conceptual

frameworks placing regional integration agreements in the national,

transnational, and global contexts.

52